Discover how to make sure that your Security Token Offering is 100% compliant with laws and regulations - even if you have never launched one before.
STO
An easily understandable guide to STO legal aspects
Whether you have been researching STOs for a long time, or you have just started thinking about getting new types of funding recently, our aim is to give you a crash course on the legal aspects of STOs - without wasting hours of your time with miscellaneous details.
After going through this guide, you will be able to:
Choose
The perfect STO type and structure for your project
Know
Which jurisdiction to use (and which ones to avoid)
Take care
Of the most important legal aspects to avoid potential fines
Architect
A three-part crowdfunding campaign to quickly acquire investors for your STO
Step one
Selecting an STO type and a possible jurisdiction
Mostly, it’s a question of whether you want to tokenize shares (equity token) or a debt instrument (a bond-type token). Each one has its pros and cons. However, due to the fact that regulations have not really caught up with blockchain technology, there are several (regulatory) technicalities and nuances that come up when you actually go through the (regulatory) details of the offering itself. And this also depends on the jurisdiction where you want to launch the STO. We often use a bond-type token, and in this case, the bond can be structured in a way that the payments are tied to your company’s performance and revenue, meaning that you as an issuer will not have to pay fixed interest to your investors. In addition, bonds can also be convertible, which means that investors have the flexibility to convert the bond into a specified amount of company shares, even after 10 years.
Just keep in mind that regulations can be slightly different based on the jurisdiction of your STO. It is of importance to take into consideration the specific laws and regulations of the country where the STO is to take place.
Currently, possible STO jurisdictions include:
- Estonia
- Lithuania
- Lichtenstein
- UK
Step two
Setting the business structure model and goal
These are basically structures through a separate entity which then also become an equity shareholder in the Base Company (acting as the revenue entity). This “Token Model” unlocks the ability to offer your investors Equity Shares and Dividend Rights. Equity shares will be bound to the equity of the Base Company, and the dividends will be paid through the profits generated through the customer purchases in the Base Company. In essence, this means ROI for investors through the Security Token Model.
There are two types of Security Tokens available:
Profit Share Rights
The investment token grants only monetary rights, the payments to the token-holders are made based on revenue, not profit, and the payment scheme must be thought through very thoroughly.
Full pack – equity and dividends
Equity Tokens grant token-holders monetary rights (right to profit distribution) and shareholders rights – e.g. participation in management and decision making
Step three
TAKING CARE OF THE LEGAL PART
First round:
The initiation
This first “round” of the crowdfunding is held considering the limitations of this exemption, which includes but is not limited to a maximum of 150 people in each EU member state, and the total hardcap of 1-8 Million Euro depending on each EU member state. The exemption means that there is no obligation to file a prospectus (sometimes called memorandum), but other documents will have to be prepared and filed with the regulatory body of the country where the financial product is aimed to be marketed.
Second round:
Investor life cycle
Is designed and built by our close legal partners, and operated closely with the customer, hand in hand with our compliance team to make sure the entire investor life-cycle and processes are complete. This includes everything from finding and onboarding investors, due diligence of the KYC and AML processes, the first investment, first revenue and profit share payments (dividends), and the reporting and growing of the investment sum of each investor through additional campaigns, always using the best practices of investor lifecycle management.
Third round:
Targeting investors
Third round of the offering is targeted at institutional and corporate investors. Together with our partners, we define and execute a private placement and an accredited investor strategy to attract major investments to the SPV. CPI arranges the full set up of all formalities, enabling STO customers to approach potential investors and promote the project under the given guidelines.
Step four
EXECUTING A HIGHLY EFFECTIVE MARKETING STRATEGY TO CONVERT MORE INVESTORS
AVERAGE YEARLY SALES INCREASE WITH YOUR CUSTOM MARKETING CAMPAIGNS
Due to the heavily-regulated marketing rules set by major advertising companies such as Google and Facebook for the crypto industry, running regular PPC ads is not an option.
Therefore, we use different marketing strategies, uniquely developed from scratch for each client but taking into consideration our vast experience from previous Software ICOs and STOs. For example, we heavily leverage the power of content marketing and a press-based approach. This means delivering insanely valuable content to educate potential investors and get them interested in the financial product.
To achieve this, we build a detailed marketing plan in which we outline the strategies for the entire communication process, in addition to setting exact goals, milestones, metrics, and KPIs.
The end result: a perpetual revenue-generating marketing engine that is able to supply the client with a steady flow of new customers so that they see a major ROI within just a few months.
Want to learn more?
We've created an ultimate guide to raising money with a security token offering